Steve Collings explains all you need to know about related party disclosures for small firms.
The Financial Reporting Standard FRS 102, applicable in the UK and Republic of Ireland, outlines the presentation and disclosure requirements for small companies in Section 1A Small Entities. Related party disclosure requirements for a small entity in the UK are outlined in FRS 102 (March 2018) at paragraphs 1AC.34 to 1AC.36. The same paragraph references apply to FRS 102 (September 2015).
Related party transactions themselves are dealt with in paragraphs 1AC.35 and 1AC.36 of FRS 102 and relate to:
- related party transactions; and
- directors’ advances, credit and guarantees.
Related party transactions
A small entity reporting under FRS 102, Section 1A must provide particulars of material related party transactions which have not been concluded under normal market conditions with:
(a) owners holding a participating interest;
(b) companies in which the entity has a participating interest; and
(c) directors (or members of the entity’s governing body).
FRS 102 does not define ‘normal market conditions’ and hence professional judgement is needed in this area. For example, where a director introduces a loan to the small company and charges a rate of interest below market rate (or at zero rates of interest), this transaction would be caught under the related party disclosure rules as the loan is not at market rate and hence has not been concluded under normal market conditions.
Where a related party transaction has not been concluded under normal market conditions, Section 1A requires the following to be disclosed:
(a) the amount of such transactions;
(b) the nature of the related party relationship; and
(c) other information about the transactions necessary for an understanding of the financial position of the small entity.
It should be noted that the names of the transacting related parties need not be disclosed under FRS 102; the standard requires the nature of the related party relationship to be disclosed instead (see (b) above).
Example disclosure – director makes an interest-free loan to a small company: During the year, a member of key management personnel provided a loan to the company in the sum of £10,000 (2017: £nil). The loan is interest-free and at the balance sheet date an amount of £10,000 (2017: £nil) was outstanding.
Advances, credit and guarantees
Directors’ advances, credit and guarantees are required to be disclosed by virtue of section 413 of the Companies Act 2006. Specifically, section 413 requires details of advances and credits granted by the small entity to its directors and guarantees of any kind entered into by the small entity on behalf of its directors must be shown in the notes to the financial statements.
The details required of an advance or credit are:
(a) its amount;
(b) an indication of the interest rate;
(c) its main conditions;
(d) any amounts repaid;
(e) any amounts written off; and
(f) any amounts waived.
Monetary amounts are required to be disclosed in respect of items (a), (d), (e) and (f).
The details required of a guarantee are:
(a) its main terms;
(b) the amount of the maximum liability that may be incurred by the small entity; and
(c) any amount paid and any liability incurred by the small entity for the purpose of fulfilling the guarantee (including any loss incurred by reason of enforcement of the guarantee).
The requirement to disclose directors’ remuneration and other benefits in the financial statements of a small entity was repealed by SI 2015/980, which transposed the requirements of the EU Accounting Directive into company law. However, just because disclosure of directors’ remuneration is no longer a legal requirement for small entities does not mean it can be forgotten!
In practice, it is not uncommon for a director-shareholder of a small company to receive a salary equivalent to the PAYE threshold and the balance of his/her remuneration in dividends as quite often there are tax advantages of structuring the director’s remuneration in this way.
The question that must be asked for related party disclosure purposes is ‘is this considered normal market conditions?’ If the answer is ‘yes’ then no disclosure is required; if the answer is ‘no’ then disclosure is required.
There is no clear-cut answer where this situation is concerned, although it is expected that most small companies will not disclose directors’ remuneration on the basis that the directors consider a salary up to the PAYE threshold and the balance in dividends to be normal market conditions. In addition, many automated accounts production software systems appear to be defaulting to non-disclosure, presumably because it is no longer a legal requirement. However, do bear in mind that this may not always be the case and professional judgement is needed.
- Steve Collings is a Partner at LWA Chartered Certified Accountants and Statutory Auditors
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